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Wilmar remains RHB's top plantation picks in 'neutral' sector

RHB has kept its "buy" call on Wilmar with a target price of $4.95.

RHB Group Research analyst Hoe Lee Leng, as well as the research teams from Singapore and Indonesia, are keeping their “neutral” recommendation on the plantation sector as crude palm oil (CPO) prices remain under pressure.

The price pressures are due to the rising stock levels in Malaysia due to the policy reversal in Indonesia.

“These levels should decrease once Indonesia’s stock levels normalise, and once the disappointing peak output caused by Malaysia’s labour shortage kicks in,” says the team led by Hoe. “The 2QFY2022 reporting season saw most planters booking results that were in line, after four consecutive quarters of beating forecasts,” the team adds.

In Malaysia, the labour shortage, which has continued to hamper harvesting activities, is expected to continue into the 3Q2022, since only a trickle of workers have come in so far. More workers are expected to enter the country in September and October, the team notes.

In Indonesia, plantations with younger estates have seen y-o-y increases in the 2QFY2022, while older estates have registered y-o-y declines.

That said, output in Indonesian plantations have recovered sequentially across the board, averaging a growth of around 26% q-o-q for the companies under RHB’s coverage.

“As usual, the Association of Indonesian Palm Oil Producers’ (GAPKI) official 2Q22 CPO output trends differed – with a 15.5% y-o-y drop and a 7.6% q-o-q decline, bringing 1H2022 fresh fruit bunches (FFB) growth to -4.1% y-o-y,” the team writes.

Despite the upcoming peak season, planters in Malaysia are said to be more conservative in its guidance for the 2H2022 given the ongoing labour shortage.

As it is, most players are expecting flattish-to-slight FFB output growth.

Meanwhile, in Indonesia, planters in the country are expecting to see higher output growth in the 2H2022 on the back of black bunch counts done and the rate of q-o-q growth in the 2Q2022. In the FY2022, Indonesian planters are expecting FFB output to grow by single digits despite the year-to-date (ytd) decline in the 1H2022.

To this end, the analysts are anticipating a “less aggressive” forward-selling stance for the 2H2022 on the back of the recent decline in prices. These planters, write the analysts, are nervous about price volatility and the direction of prices. Ytd, prices are now at RM5,800 ($1,798.33) per tonne, they point out.

Margins are also expected to improve for planters in Indonesia with downstream operations. This is as the Indonesian government has extended the tax levy holiday to end-October from end-August. With this, their counterparts in Malaysia should see lower downstream margins in the 2H2022 given the resumption of the competitive advantage Indonesia has with this change.

In August, Malaysia’s palm oil output rose 9.7% m-o-m, while exports fell 1.9%, resulting in inventory rising to 2.09 million tonnes (+18.2% m-o-m).

“Stock levels in Malaysia could remain high until Indonesia’s tax-free holiday ends (at end-October), which means exports from Malaysia could only improve towards the year-end,” the analysts write. “This, together with potential disappointments in output in Malaysia due to the prevailing labour shortages, could mean stock levels may only drop towards the year-end.”

In addition to their “neutral” call, the analysts are keeping their CPO average selling price (ASP) assumption at RM5,100 per tonne for 2022.

Among the plantation names under their coverage, SGX-listed Wilmar remains one of the analysts’ top picks. They have kept “buy” on Wilmar with a target price of $4.95.

As at 2.59pm, shares in Wilmar are trading 2 cents lower or 0.49% down at $4.05.

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